Windows 7 May Not Be Silver Bullet For Microsoft

Microsoft Corp.'s (MSFT) Windows 7 operating system is expected to be a vast improvement over its predecessor, Windows Vista. But that doesn't mean it will automatically juice sales and profits the way previous operating systems have.

Redmond, Wash.-based Microsoft hopes Windows 7 - which launches on Thursday - will burnish its core product, the Windows operating system. Some version of Windows sits on an estimated 90% of the world's computers. But corporate customers avoided Vista, which needed lots of computing power to run and had compatibility problems.

Microsoft has addressed those complaints with Windows 7. Now timing, not technology is the key. The software giant is launching Windows 7 amid a deep slowdown and a broad shift in corporate technology use. That raises questions about whether the software will be as profitable as past upgrades.

"The economics around the personal computer for Microsoft have diminished," said Brendan Barnicle, a software analyst for Pacific Crest Securities.

Microsoft has much riding on Windows 7. In fiscal 2009, the Microsoft unit that makes Windows products reported a 13% decline in sales, partly because corporate customers have shunned Vista. In April, the company reported the first quarterly revenue contraction in its 23-year history as a public company.

Microsoft didn't immediately respond to a request for comment.

The company's difficulties are reflected in its stock price. Over the last year, Microsoft shares have risen around 7%, while competitors like Google Inc. (GOOG) and Apple Inc. (AAPL) have posted much stronger percentage gains. On Tuesday, Microsoft shares was little changed at $26.37.

Typically, new operating systems fuel Microsoft's revenue performance. Revenues have posted double-digit rises for four quarters after every new OS launch to date, according to Katherine Egbert, an analyst at Jefferies & Co.

But as more and more computing takes place on the Web - so-called cloud computing - the value of these upgrades is diminishing. Corporate computers increasingly don't require powerful operating systems - like Windows 7 - that they once needed. A trend towards the greater use of smaller, lighter-weight computers is also likely to eat into the profitability of the operating system, analysts say, as smaller computers tend to feature less expensive software.

Even Microsoft's partners have acknowledged Windows 7 may not have an immediate effect on hardware sales. At a recent earnings call, Dell Inc. (DELL) Chief Financial Officer Brian Gladden said the computer maker - most of whose machines run Windows - thinks the economy will be a more important catalyst.

Still, Windows 7 will likely find traction with corporate buyers.

Roughly four-fifths of Microsoft's corporate customers are running eight-year-old Windows XP, an operating system which predates Vista and which Microsoft will stop supporting in 2014. That will provide an incentive for customers to upgrade, said Annette Jump, an analyst at research firm Gartner Inc.

And Microsoft resellers say their customers are enthusiastic about Windows 7. CDW Corp. (CDWC), one of the largest U.S. software resellers, says that 40% of its customers want to deploy the software within two years.

"At this point in the (Windows) Vista cycle we were still having the conversation about why to deploy," said Liz Eversoll, a software specialist at CDW. "Now, we're way past that."

Still, Microsoft might not dramatically increase its profits even if corporate customers start using Windows 7, analysts say. That's because many corporations buy Windows on a license basis and are automatically upgraded. In other words, Microsoft would have received that revenue regardless of whether companies are using its latest product.

Of course, "people not jumping ship to other operating systems is obviously a good thing," said Dean Williams, an executive with consultancy Softchoice.

-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com

Cdw (NASDAQ:CDWC)
Historical Stock Chart
From Apr 2024 to May 2024